Tips for Combatting High Production Costs in the New Year
Supply chain issues, increased input costs, labor challenges, and rising interest rates are all threats to profitability in 2022.
“Even if commodity prices remain strong this year – and that’s not a given – rising production costs are likely to negatively impact your bottom line,” says Max Irsik, CPA, ag advisor at KCoe Isom.
Irsik advises that soybean producers stay on top of the elements that can be controlled. “There are almost always ways to tighten costs and better manage the risks to your profit margins and cash flow.”
6 Ways to Keep Money in Your Business
- Know your production costs and lock in prices. The local coffee-talk or the trade pub you read is not your cost. Every farm has a different situation, overhead, and other costs. Account for every dollar by yourself. Evaluate your operational costs and measure what fuel, fertilizer, etc. increases will do to your potential margin – then consider locking in prices on those items. For those who don’t, it’s a scary time.
- Keep an eye on operational performance. Keep up with the market and prices for your farm commodities. Understand how much working capital you have and don’t slip below it. Use your resources, especially equipment and people, as efficiently as possible. Encourage employees to find ways to trim overall expenses where possible.
- Lock in interest rates. “If you have something you need to lock in, let’s get it done,” says Alan Grafton, farm financial management advisor at KCoe. “Try to utilize as much of the low-interest vendor financing as you can to lessen your crop loan.”
- Be smart about paying for inputs. Shop around to see if you can get a better price. Whatever your farm’s necessities -- fuel, fertilizer, crop protectants, feed, irrigation supplies – you might shave off some costs by negotiating with your vendors. Maybe they would be willing to take $45,000 if you pay now, rather than $50,000 later. Or check to see if your vendor needs to get rid of some lingering warehouse inventory and is willing to discount the cost to you.
A 10% savings here, a 1% cut there, will add up significantly. And when the bill comes in, make sure you’ve received the quantity you’re being charged for. Mistakes happen all the time.
- Consider investing in cost-saving equipment or technology. Now might be the time to invest in precision machinery, drip irrigation, or cloud-based software – all things that can reduce costs, increase yields, or both.
- Keep watch on your numbers and stay current with record-keeping. Precise numbers will reveal what you’re spending or earning, as well as monitor your cash flow needs and assist with tax planning and other financial obligations. Monitor your income and expenditures consistently, every month. Stay on top of your receipts, records, and other financial information.
It all goes back to the age-old saying, “A penny saved is a penny earned.” Every dollar you’re not spending or borrowing is keeping money in your business, and it will position your business for a more productive year ahead.
With roots dating back to 1932, KCoe Isom is a top 100 accounting firm and the nation’s leading food and agriculture consulting firm. Its specialists deliver increased value and growth for producers – from policy to plate – with comprehensive strategies and advisory in the areas of financial management, sustainability, farm programs, renewable energy and land conservation, and legacy planning. www.kcoe.com